Annual Review 1998

The Chairman’s Remarks | The
Japanese Auto Industry in Canada

The Chairman’s Remarks

"As the
Chairman of JAMA Canada, it is a great pleasure to be publishing our 1998 review of the
Japanese auto industry in Canada. JAMA Canada was established in 1984 to promote greater
understanding on economic and trade issues in the motor vehicle sector. We hope this
report will contribute to this goal."

Overview of 1997

The turnaround in the Canadian new vehicle market, which began in the fourth quarter of
1996, took flight in 1997. Even though all forecasts were conservative in their
expectations for 1997, the whole market jumped over 18% year over year, and sales of all
Japanese auto-makers in Canada soared 36% compared to the previous year, rising from
218,000 to 297,000 units. A number of factors were responsible. The consumer had finally
found renewed confidence, interest rates remained low, job prospects were brighter than
they had been in a few years, several new vehicles were in ‘hot’ demand and prices of new
vehicles were either unchanged, or in some cases, lower than the previous model year.

Production at Japanese affiliated plants in Canada also rose almost 5% in 1997 overall.
While both Honda of Canada Manufacturing and Toyota Motor Manufacturing Canada had new
record levels of output, CAMI (the joint venture between Suzuki and General Motors of
Canada) was scaling back production due to high inventories and weak demand primarily in
the US. Altogether 383,000 units were produced in 1997, and over 292,000 of these (or
about 76% of total output) were exported, primarily to the US. As a group, Japanese
automakers in Canada produce well over one vehicle in Canada for each one they sell in
Canada.

On the trade front, Canada is still a net exporter of Japanese badged vehicles, as more
units were exported from Canadian plants than were imported from Japan, the US and Mexico.
While imported vehicles from Japan doubled in 1997 due to strong demand, particularly for
some new models that are only made in Japan, reliance on North American plants will
continue to grow as new capacity in Canada and the US comes on stream later in 1998. At
the same time, parts imports from Japan continued to fall in 1997, down 12.2%, as
localized sourcing of parts and components continues to expand along with capacity.It is
particularly encouraging, in light of the expansions at Honda and Toyota, to see that
eight new parts plants have been announced over the past year by Japanese parts
manufacturers, all of which are located in Ontario. This brings the number of Japanese
auto parts and materials companies with operations in Canada to thirty-six.

Highlight Events of 1997

Apart from the recovery in the Canadian market, 1997 was a year of change, growth and
continuation. At the Canada Japan Business Conference (CJBC), which was held last May in
Toronto, Pacific Automotive Co-operation, Inc., commonly known as PAC, announced that they
were closing their operation in Canada at the end of June because their objectives had
been successfully completed. After 13 years of helping Canadian auto parts manufacturers
understand what Japanese automakers were looking for in a supplier, as well as assisting
Japanese automakers and parts makers in their decisions to invest in Canada,it was time
for PAC to pass the responsibility for development of new business opportunities directly
to the automakers and parts makers concerned. At the same time, PAC’s communication and
liaison function was transferred to JAMA Canada. As a result, JAMA Canada has also been
restructured to reflect the maturing relationship between our industries and our
countries.

Also at the CJBC last May, the Automotive Parts Manufacturers Association of Canada
(APMA) released its 1997 Japan Sourcing Survey. While there were some sampling issues,
which tended to underestimate the total and which hopefully will be addressed in future
surveys, the results showed growth in the volume of business for Canadian parts suppliers
over the 1996survey, up 9% year over year to $1.4 billion. Later in the fall, a number of
Canadian parts suppliers, coordinated by the APMA with the help of the Automotive
Directorate of Industry Canada and the Canadian Embassy in Tokyo, successfully
participated in the Canada booth at the 31st Tokyo Motor Show.

As for JAMA Canada members, in July, Honda of Canada Manufacturing celebrated
production of the ‘1 millionth car’ at their plant in Alliston, Ontario. Honda opened its
Canadian plant in the fall of 1986, and will open their new 120,000 unit minivan plant in
the fall of 1998.

Later in September, Toyota Motor Manufacturing Canada celebrated the opening of its new
120,000 unit capacity Corolla plant in Cambridge, Ontario. The original plant, opened in
1988, is being re-tooled and will begin production of the Solara coupe in the fall of
1998. All of these expanded investments mean more jobs and business opportunities for
Canadians. And with ongoing economic difficulties in Japan and other Asian countries, this
is also a strong vote of confidence in Canada and the future of the Canadian auto
industry.

With respect to trade policy issues in 1997, JAMA Canada, together with representatives
from Honda of Canada Manufacturing and Toyota Motor Manufacturing Canada made
presentations in support of the Tariff Simplification Act, Bill C-11 to the Parliamentary
Committee on Industry and the Senate Committee on Banking, Trade and Commerce. Opposing
the bill were representatives from the Canadian Vehicle Manufacturers Association and the
Automotive Parts Manufacturers Association. The main issue concerned the zero tariff
established by Bill C-11 for imported auto parts used in production.

As Minister Paul Martin and other officials in the Department of Finance clearly stated
in remarks made about this bill, Canada has had an effective auto parts tariff of zero
since 1965, and Bill C-11 will ensure a uniform manufacturing environment for all
automakers in Canada. Bill C-11 not only simplified Canada’s customs tariff act, but also
continued a long standing policy to provide all automakers in Canada with duty free access
to imported parts, an important measure considering the high level of Canadian production
that is exported. Bill C-11 passed into law without amendments. While all vehicle
manufacturers in Canada are now given equal treatment with respect to manufacturing
inputs; unfortunately, the same cannot be said for finished vehicles, as non-Auto Pact
companies continue to face a discriminatory tariff.

The competitiveness review of the auto industry being conducted by Industry Canada is
entering its final stage in 1998, and a report with recommendations is expected by the
summer. JAMA Canada continues to consult and monitor the activities and progress of the
review.

In February, 1998 we submitted a brief to Minister Manley outlining our views on trade
policy and finished vehicle tariffs. In simple terms, JAMA Canada advocates fair and equal
treatment for all automakers in Canada through open, transparent and non-discriminatory
trade policies consistent with the GATT/WTO, as well as reduced tariffs on finished
vehicles, a measure that will benefit Canadian consumers. At the current time, Canada’s
Most Favoured Nation tariff applied to passenger vehicles,while modest by international
comparison, is higher at 6.7% than either the US at 2.5% or Japan at 0%.

On behalf of the members of JAMA Canada, I hope this annual review will be useful in
understanding the activities and views of the Japanese auto industry in Canada. We welcome
any comments, suggestions or questions concerning this material.

Yoshio Nakatani

Chairman

The Japanese Auto Industry
in Canada

Introduction:

The Japan Automobile Manufacturers Association of Canada is a non-profit
trade association established in 1984 to promote greater understanding on economic and
trade matter pertaining to the motor vehicle industry and to encourage closer cooperation
between Canada and Japan. JAMA Canada’s members include the following companies who
import, distribute, manufacture and export automotive products:

Hino Diesel Trucks (Canada) Ltd., Honda Canada Inc., Honda of
Canada Manufacturing, Mazda Canada Inc., Nissan Canada Inc., Subaru
Canada Inc., Suzuki Canada Inc., Toyota Canada Inc., and Toyota Motor
Manufacturing Canada Inc.

As a group, JAMA Canada members have become an integral part of the Canadian auto
industry that makes a significant and growing contribution to Canada:

The Japanese auto industry in Canada, at least for the purposes of this review, is
comprised of more than just the current members of JAMA Canada. While JAMA Canada does not
represent any independent Japanese auto parts manufacturer, we do collect and publish
information about Japanese affiliated parts investments and operations in Canada. For a
list of JAMA Canada members, please click here. For a list of
Japanese affiliated auto parts companies in Canada, please follow this
link.

JAMA Canada Members’ Operations in Canada

(click on the image to enlarge)

Contributions to the Canadian Economy:

1. Consumer Benefits

In pursuit of satisfying the ever demanding consumer, Japanese automakers have
stimulated competition and raised the quality of vehicles not only made in Japan, but
increasingly vehicles designed and developed in North America for the Canadian and U.S.
markets. For all automakers, quality is a necessary ingredient just to be able to stay in
the game. But for Japanese automakers, quality is a constantly moving target, guided by
the now familiar concept of kaizen, or continuous improvement. What’s more, about 60%, or
three of every five Japanese brand vehicles currently sold in Canada are built in North
America. As such, the benefits to local communities and local suppliers in Canada
continues to grow, particularly as capacity in Canada expands from 470,000 units in 1997
to 730,000 units by 2001. In addition, according to opinion polls and industry surveys
over the years, Japanese vehicles still represent the leading edge in terms of
reliability, customer satisfaction and high resale value.

2. Employment

The Japanese auto industry is multi-faceted and in the aggregate, employs over 40,000
Canadians in both parts and vehicles production, imports, exports, transportation,
distribution, sales and service.In the manufacturing sector, more than 6,200 Canadians
work in three motor vehicle manufacturing plants, and about 8,800 jobs have been created
in Canada through various parts and materials operations supplying the North American auto
industry. Expanding manufacturing investments at Honda of Canada Manufacturing and Toyota
Motor Manufacturing Canada will add hundreds of additional jobs directly, plus significant
indirect employment as a result of increasing local sourcing of supplies and services.
There are in excess of 25,000 Canadians employed in about 1,000 dealerships according to
the Canadian Association of Japanese Automobile Dealers (CAJAD). Finally, there are about
1,600 people employed in the national distribution and head offices of JAMA Canada
members.

Several of our member companies maintain regional offices and warehouses in different
regions of Canada including Western Canada, Ontario, Quebec and the Maritimes. Some member
companies run operations in Canada related to vehicle engineering, design and testing.
These R&D activities focus primarily on vehicle and component cold weather testing in
Northern Ontario and in Nova Scotia.

3. Investments in Manufacturing

There are three motor vehicle manufacturing plants and over thirty-five auto parts and
related materials and machine tool operations currently in Canada. The total current and
planned investment in vehicle manufacturing by Japanese automakers stands at about $3.7
billion. Further details about Japanese vehicle and parts manufacturing in Canada can be
found in this section.

In 1996, Honda Canada reported that current capacity had been increased to 150,000
units per year due to strong demand for the Civic and Acura EL models built in Canada.
Honda Canada’s $300 million new minivan plant in Alliston, Ontario, currently under
construction, is due to open in the summer of 1998, with a capacity of 120,000 units and
an additional 1,200 associates. In 1997, Honda announced 60,000 units of capacity will be
added to the Alliston plant by 2001 depending on market conditions.

In September 1997, Toyota officially opened their new $600 million plant in Cambridge,
Ontario that increased capacity by 120,000 units with an additional workforce of 1,200
team members. TMMC will continue to make Corolla’s at the new plant and will re-tool the
original plant to make a new sport coupe, named Solara, in the fall of 1998. Their engine
plant which officially began production in October, 1995 now makes 1.8L four cylinder
engines for all Corollas built in Canada. The six cylinder engine for the Solara will be
built in Kentucky by Toyota.

When all of these expansions are complete, Japanese automakers will have a production
capacity of 730,000 units, and a workforce of about 8,000 Canadians at Honda, Toyota and
CAMI.

In 1997, Japanese automakers manufactured about 2.7 million vehicles in North America.
Canadian plants built 383,000 units or 14.2% of total Japanese production in North
America. This was slightly higher than in 1996 due to the increased output at both HCM and
TMMC.

About 76% of all the Canadian-built vehicles were exported in 1997, primarily to the
U.S. About 5,600 finished units were shipped to other countries including Puerto Rico,
Latin America and Taiwan.

Comparing exports and imports, Canada was a net exporter of Japanese vehicles for the
fifth year in a row in 1997. Imports from Japan, the U.S. and Mexico totalled 236,000
units, while 292,000 units were exported, thereby contributing to Canada’s automotive
external trade balance.

Comparing production and sales in Canada, Japanese manufacturers produced about 1.3
vehicles in Canada for every one they sold in the Canadian market during 1997. At the same
time, all vehicles that were produced in Canada for export to the U.S. met the
requirements for North American content under the NAFTA rule of origin.

Production:

In 1997, total production of motor vehicles at Japanese-affiliated plants in Canada
‹ Honda (HCM), Toyota (TMMC) and CAMI (Suzuki/GM joint venture) ‹ gained 4.6% to
383,000 units from 365,000 units in 1996. The increase stemmed from new high output levels
at both HCM and TMMC to 165,000 units (up 14.3%) and 108,000 units (up 11.2%)
respectively, offset by a drop in production at CAMI to 110,000 units (down 11.3%).

Honda ­ Output of the Acura 1.6 EL at HCM rose dramatically in 1997 to almost
11,000 units after start-up of this new model began in the 3rd quarter of 1996. The
Alliston plant also increased production of the Civic model, both 3 and 4-door versions,
up 8.7% to 154,000 units. Honda’s new 120,000 unit minivan plant will open in the fall of
1998. The second plant in Alliston will increase capacity to 270,000 units. An additional
60,000 units of capacity will be added by 2001 to bring total annual capacity at HCM to
330,000 units.

Toyota ­ At the TMMC plant in Cambridge, Toyota pro-duces the 4-door Corolla as
well as 1.8 litre 4 cylinderengines for the Corolla. Output rose to 108,000 units from
97,000 in 1996 as production shifted to the new 120,000 unit capacity plant in September,
1997. The original plant will be re-tooled to produce the new Solara sport coupe in the
fall of 1998.

CAMI ­ CAMI produces subcompact passenger cars and compact sport utility
vehicles for both General Motors and Suzuki, the joint venture partners, at the plant in
Ingersoll, Ontario. While capacity for both models is 200,000 units annually, output in
1997 was down to 110,000 units from 124,000 units in 1996 primarily as a result of
sluggish demand in the U.S. In 1997, CAMI built about 70,000 passenger cars and 40,000
sport utility vehicles. About 12% of total output was made for the Canadian market.

*estimated
                                        
Source: JAMA Canada

Exports:

As the Canadian market alone is too small to sustain rising levels of production in
Canada since the Auto Pact was signed in 1965, integration of the industry on a North
American basis has allowed foreign automakers in Canada to benefit from trade agreements
that permit access to the larger U.S. market. Like the U.S. Big 3, Japanese automakers
export a high level of their Canadian production, and likewise, rely on imported models to
serve the needs of the Canadian consumer. In 1997, three Japanese-affiliated plants in
Canada exported about 292,000 units, down 1.7% from 297,000 units in the previous year.
About 98% of exports are shipped to the U.S., while about 5,600 units are exported to
other destinations, such as Puerto Rico, Taiwan and Latin America.

Honda’s exports of finished vehicles from Canada in 1997 reached a new high level at
over 121,000 units, a gain of 7.3%. TMMC’s exports rose 10.0% to about 74,000 units, also
a record level. CAMI shipped 17.1% fewer units in 1997 than in the previous year, down to
97,000 from 117,000 in 1996.

The ratio of units produced to units exported dropped in 1997 from a year earlier.
About 76.2% of all vehicle production was exported in 1997, down from 80.5% in 1996.
Canada was a net exporter for the fifth consecutive year in 1997, as exports exceeded
imports. While over 292,000 vehicles were exported from Canada, about 236,000 units were
imported in total from Japan, the U.S. and Mexico.

Imports:

Overall imports of finished vehicles by JAMA Canada members climbed 58.7% in 1997 to
about 236,000 units, as a result of increased shipments from both Japan and the U.S. The
higher level of imports stemmed directly from robust market demand in Canada as the
consumer regained confidence and returned to the market in larger than expected numbers.

Imports from Japan doubled in 1997 to 141,000 units over the year earlier, when
shipments from Japan hit a 25 year low. Supplying customer demand for new vehicles,
particularly those manufactured only in Japan, was the primary reason for the influx of
finished vehicles, ending five consecutive years of declining imports. At the peak, more
than 295,000 units were exported to Canada, back in 1987. However, with expanded capacity
and new vehicle production starting later this year, the trend to greater reliance on
sourcing in North America will continue.

Imports from the NAFTA region (U.S. and Mexico) also made gains in 1997, rising 21.1%
to 94,800 units from 78,200 units in 1996. Passenger car shipments climbed 12.3%, while
light-duty trucks jumped 76.6% year over year.

In 1997, 60%, or three out of every five vehicles sold in Canada by JAMA Canada
members, were built in North America.

Source: JAMA

*estimated
                                       
Source: JAMA Canada

4. Sales:

Overall sales of Japanese-badged vehicles, both imported and locally built models
exceeded all forecasts by a wide margin, up 36.2% to 297,000 units for all JAMA Canada
members. This was their best sales year since 1992. As in the overall Canadian automobile
market, light trucks led the way in sales and market share growth. However, unlike the
overall market, light truck sales accounted for only 24.1% of total Japanese vehicle
sales, in contrast to 47% for the Canadian market as a whole.

Passenger car sales recorded a solid increase of 23.7% to 226,000 units. Stellar gains
were evident in the light truck segment as sales doubled in 1997 to 71,000 units from
35,500 units the year before. Over 60% of sales were models built in North America. By
class of vehicle, about 70% of passenger cars and 25% of light trucks were North American
built. Several JAMA Canada members achieved new record high sales in 1997 including Honda,
Toyota and Subaru. Japanese brand market share gained 3 points in 1997 over the previous
year, rising to 21.3% from 18.0%. Passenger car share rose from 28.1% to 30.6%, while the
light truck share jumped 4 1/2 points to 10.8% from 6.3%.

Source: AIAMC, JAMA Canada

Source: AIAMC